Volatile world market makes forecast hard
Volatile world market makes forecast hard
Growing exposure to the global marketplace is
increasing grain price volatility and cutting
margins. Marketing has become an essential
skill and this special focus, edited by
Olivia Cooper, provides some tips to help
growers. Robert Harris starts by asking
one world grain player for its views
on next seasons markets
GRAIN prices in the UK have recently undergone one of the biggest swings in history.
To understand how much the picture has changed, and what might affect the 2002/03 marketing campaign, it is worth reviewing the current season.
London wheat futures for May 2002 came onto the board eighteen months ago, settling at about £71/t (see graph). But perceived problems around the world, including smaller crop areas, crop development and weather concerns underpinned the world market. At the same time, the UK harvested just 11.6m tonnes of wheat, its smallest crop for years. This created a deficit on the home front, and the market quickly rose from export-led to import values.
By harvest, May 2002 futures were trading at £89/t. "Everyone was getting revved up for a buoyant season," says James Maw, wheat trader at Thame-based Glencore Grain. "However, the first signs of a big surplus in eastern Europe then appeared."
Usually, the EU imports about 2.5m tonnes of wheat a year. "Forecasts now stand at 8.5m tonnes, turning the EU into the worlds biggest grain importer this season."
Ever-cheaper
High prices in northern Europe allowed Black Sea wheat to trade into the Mediterranean, forcing displaced suppliers like Denmark, Germany and France to send their wheat at ever-cheaper prices to the UK.
Many EU traders, especially in co-ops, held onto grain, hoping for an upturn. This supported prices for a while, but also tightened supply, meaning the EU imported about 2m tonnes more wheat than was necessary, says Mr Maw. The eventual realisation that the UK and other key European countries would end up with an exportable surplus helped to precipitate a price crash not seen for decades.
The May futures price lost 20% of its value by mid-April, bottoming at £64/t, though it has since crept back to just over £68/t. New crop values suggest little immediate change, with London wheat futures worth £65/t for November.
"At the moment, the world is looking at wall-to-wall wheat," says Mr Maw. "The UK could harvest 16.5-17m tonnes, pointing to an exportable surplus of 4.5m tonnes. We could also carry out 300-400,000t this season."
This pattern is repeated in Europe and further afield. The latest International Grains Council estimate puts world wheat production at 597m tonnes, 18m tonnes more than last years harvest, while consumption is expected to rise just 2m tonnes to 600m tonnes. Output in the main exporting regions – North America, Argentina, Australia as well as the EU – is forecast to grow by 4m tonnes.
New "exotic" exporters, notably China and India, are set to increase production by a few million tonnes. Production in central and eastern European countries might slightly, though some reports suggest hard currency earnings from recent exports are boosting input use. "These regions are also carrying over a lot of wheat, so exports could reach this seasons level of 9m tonnes," says Mr Maw.
Italy and Spain
New crop Black Sea-origin wheat has already traded into Italy and Spain, traditional UK export homes. About 1m tonnes, half those countries total import requirement, has been secured from next September through to March 2003, with the latest deals being done at k117/t port-side.
"That equates to a UK ex-farm price of just £53-55/t," says Mr Maw. "Thats about the current harvest price, some £6-8/t below autumn values, which illustrates the potential downside. To export our surplus we could see a flat price through to the New Year at least."
That may be true for straight feed wheat. But at least 50% of the UK crop in the ground is Group 3 soft milling types, and a further 35% is Group 1 and 2 potential breadmakers. "We should be able to compete at the upper end of the market, provided we get a good harvest."
Significant upturn may require more radical solutions, such as a crop disaster in one of the main wheat areas of the world. April to August is a crucial time for crop development in northern hemisphere countries. "There could be some weather market opportunities in the next few weeks," says Mr Maw.
Output in Black Sea countries is difficult to pin down, he adds. "There are reports that soil moisture is short." The US crop is also in poor condition. But, with the USs influence as a world price setter now much diminished, that has had little effect so far. But, if it continues, Korea and other Third countries could look elsewhere for wheat. And Argentinian and Australian crops have not even been drilled.
"If sterling were to come crashing down, then of course we would see a reciprocal rise in grain prices," says Mr Maw. "To base a marketing strategy on this alone could be risky."
Provided Black Sea countries have large surpluses they are likely to dictate global values for the second season running. Brussels has been criticised for its stance on Black Sea imports, and has been reluctant to grant export subsidies in the past two years. However, the recent move by the EU to raise soft wheat tariffs shows that these policies are not set in stone.
Intervention criteria have also been tightened since UK wheat growers last used the system three years ago. That will block, or mean severe deductions for all but the best milling wheats, so will offer little support to the UK market.
But it could provide a realistic backstop for barley – a market also eroded by Black Sea grain. "More than 11,000t has been offered into intervention this season, so the system does work for the UK barley grower."
This, and barleys £5-12/t discount to wheat this season, suggests limited downside for the crop in the 2002/03 campaign, even though EU output is pencilled in at 49m tonnes, slightly more than last harvest.
Intervention equates to £57-58/t ex-farm, putting a reasonable bottom in the market, especially as new crop Black Sea barley has traded at £7-8/t below that level, says Mr Maw. *
MARKET OUTLOOK
Negative
* Big world wheat crop forecast.
* Cheap Black Sea wheat available.
* Little UK wheat suitable for intervention.
* Adverse currency exchange rates.
Positive
* Good quality varieties available for export.
* Drought concerns in US and perhaps Black Sea.
* Sterling could weaken.
MARKETOUTLOOK
• Negative
• Big world wheat crop forecast.
• Cheap Black Sea wheat available.
• Little UK wheat suitable for intervention.
• Adverse currency exchange rates.
• Positive
• Good quality varieties available for export.
• Drought concerns in US and perhaps Black Sea.
• Sterling could weaken.